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Microsoft Plans $40 Billion Stock Buyback

In an effort to keep shareholders happy, the software giant also boosts its dividend 22%.

Microsoft Corp., the world’s largest software maker, announced a new $40 billion stock buyback plan and increased its dividend 22 percent, seeking to reward shareholders as the company undergoes a change in strategy and leadership.

The repurchase program, which has no expiration date, replaces another $40 billion buyback plan that was due to lapse at the end of this month, Microsoft said today in a statement. The company’s quarterly dividend will rise to 28 cents a share, payable on Dec. 12 to shareholders of record as of Nov. 21.

The move is a step in the right direction for investors, though the open-ended schedule for the new buyback plan raises questions, said Matthew Hedberg, an analyst with RBC Capital Markets in Minneapolis. The company has come under pressure from activist investor ValueAct Holdings LP, which pushed Microsoft to return more money to shareholders, according to a person with knowledge of the matter.

“What would be more interesting is if they put more parameters on the timing of the buyback -- sooner is better than later,” said Hedberg, who has a neutral rating on Microsoft. “The dividend is more material because it’s incremental to their existing dividend.”

Shares of Redmond, Washington-based Microsoft rose 0.7 percent to $33.04 at 11:49 a.m. in New York. The stock had added 23 percent this year through yesterday.

The new 28-cent dividend tops the 26 cents estimated by analysts, according to data compiled by Bloomberg. The increase gives Microsoft an indicated yield of 3.4 percent, providing one of the largest payouts among technology stocks. Intel Corp.’s 3.8 percent 12-month indicated yield is the only U.S. technology company with a market value of more than $100 billion that pays more on that basis.

After struggling to keep up with rivals in the smartphone and tablet markets, Microsoft is retooling its strategy and seeking a new chief executive officer. Steve Ballmer, who has run the company since 2000, announced plans last month to retire when a replacement is found. The company also agreed to buy Nokia Oyj’s phone business for $7.2 billion, aiming to bolster its position in mobile devices.

ValueAct Accord

Microsoft signed a pact last month to cooperate with ValueAct, saying it would hold regular meetings with the firm’s president, Mason Morfit. Under the agreement, ValueAct also has the option of having Morfit become a director beginning at the first quarterly board meeting of 2014.

Coupled with the leadership shakeup, Microsoft’s latest move suggests a shifting attitude at the company, said Rick Sherlund, an analyst at Nomura Holdings Inc. in New York.

“Things are changing at Microsoft with respect to corporate governance that we believe could benefit shareholders over the next six to 12 months,” he said in a report.

While the dividend increase was more than Sherlund had estimated, the significance of the buyback plan is harder to pin down, he said.

“The pace of share repurchase had slowed at the company, so it is not clear that the new program implies any more aggressive plans,” said Sherlund, who recommends buying the stock.

Peter Wootton, a Microsoft spokesman, declined to comment on when the company will make the repurchases.

The size of the buyback eclipses most repurchase programs, though it’s smaller than the $50 billion plan announced by Apple Inc. in April. That company is authorized to repurchase a total of $60 billion in stock. Including dividends, Cupertino, California-based Apple expects to dole out $100 billion in shareholder rewards by 2015.

Apple held its first bond sale since 1996 to help finance the shareholder rewards, taking advantage of low rates. Like Microsoft, Apple has much of its cash overseas, making it harder to free up for dividends and buybacks.

Microsoft may have to do something similar depending on how quickly it wants to make the buybacks, Hedberg said.

“They had enough working cash and cash-flow satisfying ability for their existing dividends, so I expect that they won’t need extra capital,” he said. “If they got more aggressive on timing, they might have to tap into debt markets.”

Bing Website

Microsoft is grappling with a shift from the personal- computer market -- where its Windows and Office software is dominant -- to mobile and Web-based applications. While Microsoft’s traditional products remain profitable, its expansion into new areas hasn’t gained as much traction.

The company said in July that its online-services business, largely advertising revenue from the Bing search engine and other online properties, posted an operating loss of $1.28 billion in the fiscal year ended June 30.

Microsoft should work on better linking its biggest businesses -- Windows, Office, and Server and Tools -- rather than concentrating on peripheral products like Internet search and the Xbox video-game lineup, Sherlund said.

“The new CEO search could result in a tighter focus on its lines of business,” he said. “We have suggested search and Xbox lose money and are not essential.”

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